UK ‘Non-Domiciled’ status – facts and fictions
By Sovereign Group Chairman Howard Bilton
There is continual debate about those individuals who are non-domiciled but resident in the UK. Are they an asset to society who assist wealth generation in Britain, and we are lucky to have them? Or are they free riders enjoying all the benefits of British society without paying their way at the expense of ordinary taxpayers?
The issue is highly contentious. But most of the debate seems to ignore the facts. Detractors and acclaimers alike are inclined to pick a headline that suits their argument rather than to present a reasoned argument on which a considered decision can be made.
What seems incontestable is that ‘non-doms’ do not pay their ‘fair share’ of tax if judged purely against the percentage of total income paid by ordinary UK taxpayers who do not – and cannot – enjoy that status. A train driver or a nurse earning £50,000 a year in the UK, for example, will be taxed £12,444. They will therefore ‘take home’ £37,556 per year after income tax and National Insurance, which means their average tax rate is 24.9%.
In fact, for higher-rate UK taxpayers Sovereign once calculated that on earned income taxed at 45% the effective government take was nearly 85% if you also factored in the tax built into typical expenditure patterns – National Insurance, council tax, road tax, car tax, fuel, alcohol and tobacco duty and then 20% VAT charged on top of everything.
By comparison, a billionaire non-dom will only be paying a tiny percentage of his or her income to HMRC. But that is not, of course, the full picture. A non-dom will typically be paying substantially more than the nurse or train driver. The worker above pays £12,544, whilst HMRC tells us that the average tax take from non-doms in 2021 was £115,607 per person. Almost ten times as much.
Let’s look at the figures. UK resident non-doms are entitled to use the ‘remittance basis’ for up to 15 tax years in any given 20, which allows them to shelter foreign income and gains from UK income tax and capital gains tax. They only pay tax – at the standard UK rates but without any allowances – on foreign income and gains that are remitted to the UK, either directly or indirectly. After using up this entitlement, and if they stay in the UK, they become ‘deemed domiciled’ for all tax purposes until they cease being UK resident.
For the first seven out of nine tax years of being UK resident, they can use the remittance basis without charge. For the 8th to 12th tax years (out of 14), they are required to pay the remittance basis charge of £30,000 for each year they choose to use the remittance basis. For the 13th to 15th tax years, the charge rises to £60,000 per year.
On top of this, non-doms will likely also be employing people, creating businesses, paying large amounts of VAT, and contributing to all other taxes apart from income tax. It isn’t possible to calculate what additional contribution this makes to the economy, but it must be considerable. The argument remains, however, that the non-dom regime is essentially unfair. Added to which non-doms fuel house price inflation in certain areas, such that they’re no longer affordable by ‘decent, hardworking UK taxpayers’. This is all true.
What would be a fairer system? It would be easy, of course, to abolish the status altogether but would that result a net gain to the UK Treasury? Phillip Fisher, writing in AccountingWEB, argues that “there can be no good reason for the continued existence of what is clearly now a dated and very expensive luxury item” and that “no other country has ever considered allowing massive tax reliefs to those who are not domiciled”.
Technically that might be the case – but only in the sense that most countries don’t recognise or apply the concept of ‘domicile’. It is far from the whole story. Most countries in the world actively try to entice wealthy new residents with extraordinary beneficial tax breaks, as a quick glimpse demonstrates:
- Most Swiss Cantons permit the option of forfait taxation, which offers immigrants a fixed lump sum tax deal.
- Portugal gives new residents a ten-year tax-free deal under its Non-Habitual Resident (NHR) regime.
- Italy will grant a fixed rate of tax to new residents.
- Spain grants tax breaks under the Beckham rule.
- New Greek residents can pay a flat rate of €100,000 for 15 years if they remain domiciled outside Greece.
- Gibraltar’s ‘Category 2’ allows individuals with foreign businesses to pay tax only on the first £118,000 pounds of income at ordinary rates, a maximum tax of £44,740 pounds per year.
The list goes on. There is fierce international competition to attract wealthy new immigrants.
A report recently published by the London School of Economics suggested that removing non-dom tax status would raise more than £2.3 billion. Presumably the LSE’s figures assume that if the status was abolished all the non-doms currently in the UK would stay. They won’t. Some non-doms leave every time the benefits of the status are reduced. HMRC’s own figures confirm that if the tax benefits are reduced the amount of tax raised is also reduced.
After the major change in non-dom tax legislation in April 2017, the number of taxpayers claiming non-dom status in the 2017/18 tax year fell by 12,200 (13%) and the amount of revenue generated decreased from £9.4 billion to £7.5 billion (c. 20%), so by a disproportionate amount to the decrease in claimants. This would suggest that those that had paid the most tax were no longer claiming the remittance basis – approximately half of these people left the UK, and the other half were now deemed UK-domiciled and so paying tax on their worldwide income and gains.
HMRC stated that this latter group paid approximately the same in in 2017/18 as they paid in 2016/17. The statistics also showed that the amount of tax paid by each non-dom had fallen, which could also indicate that the 6,000 that left the UK were the ones paying the most tax. The average tax per non-dom was £96,284 in 2017/18, compared to £104,851 in 2016/17.
It does seem certain that if non-dom status were to be abolished altogether there would be fewer wealthy new immigrants coming to Britain. After all, they certainly aren’t flocking to Britain for the weather. But we can’t calculate what loss this would mean for the economy.
The US taxes the worldwide income of anybody born in the USA, who holds a green card or who holds US nationality irrespective of whether they live and reside in the US. Is that unfair? Those who have lived abroad for many years do not use any of the facilities paid for by the taxes collected by the IRS (except arguably for the consular networks and protections that this affords). But the only way to rid yourself of US tax liability is to renounce your nationality, pay the exit taxes and move elsewhere.
Most other European countries tax the worldwide income of their residents, similar to a domiciled and resident UK person. But once they have left that country, their tax liabilities end – including their liability to worldwide estate duties. The UK is unique in charging IHT at 40% on those who have left the UK many years previously simply because they are deemed to have retained their UK domicile. Remember a UK domicile is difficult to acquire but hard to lose.
Hong Kong charges only 16% tax but only on Hong Kong-sourced income, so many residents who have international business have an effective rate of tax in the low single figures. But Hong Kong still generates a tax surplus. Isn’t this an argument that lower taxes generate more income rather than less?
Monaco does not tax individuals on their income, and corporations that make 75% or more of their profits in the country are also tax-exempt. It relies heavily on the tourism industry to generate revenue and charges a VAT of 20%, stamp duties on documents and a 33.33% tax on corporations with profits exceeding 25% from offshore sources.
Despite there being a general move internationally towards fairer taxation of the digital economy and to tackle base erosion and profit shifting (BEPS), it is highly unlikely that all countries will ever agree to apply the same tax rate in the same way. Taxation will therefore always be a factor when companies or individuals decide where to locate or relocate – as will the country’s political and economic stability, the environment, the infrastructure, the culture, the language, the living costs, the cuisine, and everything else that dictates the quality of life.
Remember the OECD’s attempt to harmonise global tax rates through its initiative against ‘harmful tax competition’ in 1998? Three years later, then US Treasury Secretary Paul O’Neill broke ranks stating: “I am troubled by the underlying premise that low tax rates are somehow suspect and by the notion that any country, or group of countries, should interfere in any other country’s decision about how to structure its own tax system.
“I also am concerned about the potentially unfair treatment of some non-OECD countries. The United States does not support efforts to dictate to any country what its own tax rates or tax system should be and will not participate in any initiative to harmonise world tax systems. The United States simply has no interest in stifling the competition that forces governments – like businesses – to create efficiencies.”
O’Neill was right. Why should high tax countries bully other countries into raising their tax rates when they don’t want or need to?
This writer thinks it is impossible to accurately predict the financial result of abolishing the UK’s non-dom status, but the overwhelming evidence suggests that the UK’s tax take would fall rather than rise. But please let’s stop headlines like “abolishing non-dom would earn the UK an extra £2.3 billion” when HMRC’s own figures suggest that every time the tax rate on non-doms rises the tax take falls. (Yes, and the NHS will get an extra £350 million a week if we leave the EU!).
It may be that the heavy price of abolishing non-dom status is a price worth paying on moral grounds and that the present inequitable situation should not be allowed to continue. Fair enough. But those who argue for abolition should also realise that the net result is likely to be increased taxes for them and all the other UK taxpayers that they claim to be protecting. Is this a price that they are prepared to pay to remove the ‘non-dom’ anomaly?